Apple(NASDAQ:AAPL) It is the second largest company in the world, with a market capitalization of $3.8 trillion (as of February 12). However, I think it will be surpassed by others in the coming years.
The reality is that Apple’s artificial intelligence (AI) strategy has failed and it is now relying on Google to save the day. Furthermore, it has not launched any new, innovative products in recent years, indicating that it is building on past successes, not future innovations.
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This may open the door for some companies to overtake Apple in terms of valuation within a few years, and I think Apple’s days as one of the largest companies in the world are numbered if it doesn’t start innovating again.
One of the reasons Apple has such a high market cap is its valuation. Compared to Alphabet(NASDAQ:GOOG)(NASDAQ:GOOGL), microsoft(NASDAQ:MSFT)and Amazon(NASDAQ:AMZN)Apple has a large premium, as measured by the price-to-earnings ratio.
YCharts AAPL PE Ratio Data
With a price-to-earnings ratio of 32, Apple is much more expensive than the other three stocks that I think will be worth more in three years. I’m not against a stock having a premium valuation, but you have to earn it. I don’t think Apple’s is.
Just take a look at the growth rates of these companies over the past few years.
GOOGL Revenue Data (Quarterly YoY Growth) from YCharts
Although Apple had a good Christmas quarter, I need to see more results before I’m willing to give it a premium. The reality is that Apple has achieved single-digit revenue growth or worse in recent years. The other three have been growing much faster and I would expect that trend to reverse in the coming quarters for Apple.
If it can deliver double-digit growth like it did last quarter, I think a slight premium is justified (although not the huge one it has now). But until then, I like the chances of the other three stocks rising at a much faster pace.
If you look at the gross net income figures, you can see which components should be worth more if each of them had the same earnings multiple.
GOOGL Net Income Data (TTM) by YCharts
Using that logic, Alphabet and Microsoft should be worth more than Apple, although Amazon still has a ways to go. I believe Amazon can close the gap in the coming years, and the main way to do so is through its cloud computing platform. Alphabet and Microsoft also have a thriving cloud computing business, which offers a huge advantage that Apple doesn’t have.
In the fourth quarter, Alphabet’s Google Cloud posted its best quarter, with revenue up 48% year over year. Microsoft’s Azure and other cloud services posted the second-best quarter at 39% year-over-year. Amazon Web Services (AWS) was the slowest growing at 24% year over year, but it was also its best quarter in more than three years. AWS has developed some chips to compete with those from larger players, and that business is growing at a triple-digit rate.
Cloud computing is a big part of AI development because it gives developers access to computing power that doesn’t make sense to develop individually. Cloud computing is on a multi-year boom trajectory thanks to the development of generative AI. It will propel Alphabet and Microsoft to new heights and will also cause Amazon’s profits to skyrocket in the coming years. I think it could get to the point of surpassing Apple. However, if Apple can launch an innovative new product or feature that increases its revenue, Apple may prevail.
Time will tell how Apple will fare, but one quarter will not define a company’s comeback. If Apple can generate similar growth in the coming years, then its premium valuation is justified. Until then, I remain skeptical and prefer these other three stocks.
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Keithen Drury has positions in Alphabet, Amazon and Microsoft. The Motley Fool has positions and recommends Alphabet, Amazon, Apple and Microsoft. The Motley Fool has a disclosure policy.
Prediction: 3 Stocks That Will Be Worth More Than Apple in 3 Years was originally published by The Motley Fool
